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Dealing with the death of your SMSF client

The death of a client is a tricky time for SMSF practitioners – for all sorts of reasons. Just one of these is the challenge of knowing what to do with the SMSF itself.

Part 1

Following the death of an SMSF client, there is a range of questions or problems that must be resolved including what needs to be done to deal with the death benefit, if the fund will be wound up or if the trustees need to be changed.

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Dealing with death benefits is generally well covered in other technical publications but in our experience it's often dealing with the trustee that is still the subject of some confusion.

One of the key rules of SMSFs is that members have to be trustees (or directors of a corporate trustee) and trustees / directors generally also have to be members. Consequently the death of a member will almost always require a change in the trustee arrangements for the fund.

It is reasonably well known these days that the executor of a deceased member can fill some important roles and exercise some important powers in relation to the SMSF. Many of these don’t happen automatically, they simply allow the executor to do certain things without causing the fund to fail to comply with the SMSF rules about trustees and members.

For example:

The executor can become an individual trustee (or director of the corporate trustee) in place of a deceased member without breaching the trustee rules. But this doesn’t happen automatically – it would require the normal process for appointing a new trustee / director. For a corporate trustee the relevant document will be the constitution – how are new directors appointed? For individual trustees it will be the trust deed which will often grant that power to the fund’s members or remaining trustee(s). Superannuation law doesn’t make it happen, it just allows it to happen.

This special ability for the executor to be a trustee / director despite not being a member only applies during a finite period of time: starting on death and ending when the death benefit starts to be paid out. If the death benefit is paid out immediately – for example, via a reversionary pension to the spouse, that period never actually arises.

Many deaths result in a two-member fund collapsing to a one-member fund. Remember that one member funds can always have two trustees (or two directors of the corporate trustee). Inserting an additional trustee / director under these circumstances does not rely on using the above special rule. The second trustee could be someone other than the executor and there is no appointment time limit

Often the executor is the surviving spouse who is now perhaps the sole individual trustee. While that situation obviously isn’t sustainable indefinitely, it doesn’t prevent the individual trustee from making the normal decisions about the fund – for example, appointing a new trustee.

What if the executor is multiple people (for example, the deceased’s three children)? Under these circumstances one, all or just some combination of the executors could become additional trustee(s)/ director(s) of the fund. Remember though, having just one in place would give that individual vastly more power than the others when it came to distributing the superannuation benefit. On the other hand, having all three would potentially mean they could outweigh the wishes of (say) a remaining member such as the surviving spouse.

Once appointed, the executor is a trustee like any other trustee. In the absence of any special provisions to the contrary they will participate in decisions far beyond just dealing with the death benefit. They will share responsibility for the fund’s investment strategy, appointment of suppliers, insurance just like any other trustee / director.

And of course, sometimes it's just as important to know when the trustee of the SMSF doesn't have to change. Why do work that doesn't need to be done? That's something we can explore in another post.

This is an extract from an article that first appeared in Heffron SuperNews, a monthly technical publication from Heffron SMSF Solutions.

Part 2

In Part 1, I talked about the importance of knowing when to "do something" about the trusteeship of an SMSF when a participant dies.

But it also pays to know the rules on when things don’t have to be changed to avoid doing work that doesn’t need to be done.

The six-month window

Superannuation law recognises that it is not always possible to take action immediately when circumstances change. For that reason, funds have six months of breathing space to change the trustee arrangements when a member dies.

Note that this six-month period applies under a range of other circumstances too – for example, when a member simply leaves the fund. Interestingly, it does not apply when a new member joins the fund. They have to meet the new rules, generally by becoming a trustee, immediately.

Let's say a fund had two members who were both individual trustees and one died. Sometimes the survivor will choose to wind up the fund at that point and transfer his / her balance to a public super fund. It may well be possible to do this within the six-month window, avoiding the need for a change in trustee. Unless there is something specifically preventing it in the trust deed, the remaining member (now the sole individual trustee) can act alone during that period, avoiding the need to ever change the trustee arrangements.

Of course, if the survivor is going to keep the fund running in the future, a change in trustee will be necessary.

Corporate trustees

Remember that corporate trustees survive the death of a director. While it might be necessary or desirable to appoint another director, the fund does not need to change the trustee. This is actually one of the many advantages of having a corporate trustee – companies don't die.

Remember also that corporate trustees of SMSFs can always have just one director. In our example above (two members who are also trustees and one dies), the survivor could continue the fund after the death of one participant with no need to change either the trustee or the directors of the company.